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The emergence of Co-living and its role in PRS

Rebecca Taylor, 27 October 2017

There is a fundamental demand and supply mismatch in the UK's housing market and therefore there is a desperate requirement for an increase in accommodation. Long Harbour's strategy is to deliver bespoke designed build to rent stock across the UK with a focus on well sized apartments supported by considered and relevant amenity space and an excellent customer service offering. We strive to deliver homes that are slightly larger or on par with the local offering creating long term appeal to our residents. As such, whilst there has been an increase in the discussion and delivery of co-living developments, we see this as a niche sub sector of the wider PRS / BTR market. The extension of the office to residential permitted development rights (PDR) and sites with extant student accommodation permission has certainly assisted in driving the increase in co-living developments across the capital.

As there is a need for all housing tenure types all across the country so there is a growing need for this type of accommodation among young people who, based on their time as a student, enjoy and are comfortable with communal living in good quality, well-located residences, which also provide a more affordable means of living and an opportunity to expand their social network. This young demographic are attracted to the quality of accommodation, convenience of city-centre living, and the sense of community where there are some who are prepared to compromise on space, in exchange for the lifestyle and cultural benefits, Co-living could appeal to those in transition from from student into the wider rented sector and build to rent stock.

In the UK, Co-living is such a nascent, niche sub sector that at the moment most institutional investors are struggling to recognise it as a standalone asset class and assess how it sits in the PRS sector alongside build to rent and student accommodation. Lack of comparable evidence and schemes that have been delivered within a student planning use, create inconsistencies between valuation and expected exit prices for developers. This may change as co-living matures and the quality of the product improves, but at the moment it’s not on the priority list for the typical institutional investor or our institutional PRS fund, as we remain to be convinced by the prospective long term revenue streams and capital values being attributed. As a long term fund, one could argue that our fund and similar investors will be best placed to take on the product, however lack of evidence on operational efficiencies, tenant retention, void periods, the ability to grow rents coupled with the tight entry yields in the sector, means any margin of error creates too much risk for investors.

While it undoubtedly has potential to grow, for the foreseeable future it is likely to remain a niche sub sector of build to rent and will be dependent on continued availability of PDR stock, availability of land and the planning regime. As with the UK the US has seen fast growth in this sector in recent years, and likewise this has been anchored around prime cities such as New York, San Francisco and Washington. In the UK, the majority of co-living schemes are anchored in and around London, which mirrors a similar split in the US with the proportion of such developments in New York. There is a huge need for new housing stock and tenure types across the country and as such it would be disingenuous to dismiss co-living as a passing trend, but equally it has a long way to go before the investor community starts to recognise it as a major new asset class. For now we will continue to focus on our strategy and watch the space closely.